GFL Environmental Inc. Q1 FY2025 earnings call

• First quarter results were better than guided for 2025 with 12.5% revenue growth and 120 basis points adjusted EBITDA margin expansion, the highest first quarter adjusted EBITDA margin in history.
• Pricing strategies generated excess price cost spread, with first quarter pricing at 5.7% higher than plan. Volume was positive despite weather impacts, with tailwinds from growth investments like EPR offsetting weather weakness.
• Labor turnover rates improved by over 200 basis points in the quarter compared to Q1 2024 and nearly 800 basis points compared to Q1 2023. Renewed large residential municipal collection contracts in Canada with material price increases.
• Sale of ES business closed on March 1, with $6 billion cash proceeds used to repay over $3.5 billion debt and repurchase over $2.5 billion of shares, resulting in net leverage of 3.1x, the lowest in company history. Credit ratings upgraded by S&P and Moody's.
• Focus on maximizing ROIC with organic growth initiatives like EPR and RNG, accretive M&A, and opportunistic share buybacks. Year-to-date spent $240 million on three M&A deals, acquiring over $85 million annualized revenue.

Consolidated revenue for the quarter was $1.56 billion, which was ahead of guidance and 12.5% ahead of the prior year pro forma for divestitures. Adjusted EBITDA margins were 27.3% for the quarter, 120 basis points higher than the prior year and ahead of the guide. The Canadian operations benefited from renewing two long-term collection contracts with the city of Toronto, which are significant contributors to the Canadian operations. Revenue contribution from these contracts was not specified in absolute terms but they are major contributors to Canadian operations.

• Expect revenue growth of approximately 12.5% and adjusted EBITDA margin expansion of 120 basis points for the first quarter, with positive momentum continuing into April and expected to continue for the rest of the year.
• Q2 guidance: Consolidated revenue approximately $1.675 billion, adjusted EBITDA approximately $505 million (30% adjusted EBITDA margins), adjusted free cash flow approximately $100 million.
• Committed to achieving an investment grade credit rating and expect to focus investments on maximizing ROIC, with M&A pipeline robust and potential to meet or exceed $700 million to $900 million M&A target.
• FX rates impact annualized revenues, with every 1 point move affecting approximately $30 million.

• Tariffs could have an inflationary impact on CapEx or cost structure, but so far no direct material impact seen. Macro uncertainty poses risks, but company confident in operating in such environment. Weather impacts on roll-off and special waste volumes in certain markets, though rebounds seen in March and April.

Q: Just maybe a first question on the margin side. I think, Luke you noted there's a couple of moving pieces in the margins there. If you can maybe just walk us through -- maybe a bit of an update on some of the margin initiatives you outlined at Investor Day, what are you chipping away at this year? And could sort of continued progress on the margin side be a source of upside to the guidance as we look ahead to the rest of '25.

A: Yes. Thanks, Saba. Great question. When I talk about the margin bridge year-over-year, as you know, I would like to sort of isolate the macro or the factors outside of our control, right? So if you think about this quarter, Commodities was a tailwind as was FX. You had about 15 basis point benefit from commodities and about 10 basis point from FX. You also had the extra day, right, the difference year-over-year quarter, and that's about a 25 basis point benefit to margins. And then M&A for this quarter, M&A was sort of accretive. That was a 20 basis point tailwind. And then the divestitures, as we've been talking about, have also been accretive to margin, that was about a 60 basis point benefit. Now going against that, again, sort of things outside the normal course base business, as I said in the prepared remarks, we've received these onetime royalty payments at two of our landfills that were historical catch-ups last year. That was about a 50 basis point headwind to margins. I also mentioned these accruals associated with the ES as we gave some of the provisions related to insurance, bad debt, et cetera, to the ES business, we just had to true up in RemainCo a little bit, and that was about a 60 basis point impact. And then you had the weather, right? I think it's probably consistent with all the other groups talking about weather impacts, particularly in February. And we estimate that was about a 20 basis point impact. So when you look at that, what it left with, and you sum that all up, is there's over 100 basis points of underlying margin expansion. And where is this coming? I mean, first and foremost, it's the price cost spread as we've been talking about, and we'll continue to do so. But then you have the incremental benefit of all the pieces that we've been talking about. Right? So EPR is coming in and starting to contribute the RNG contributions, asset utilization. So I'd say Saba, it's not any one thing, but it's the combination of all of the things. And obviously, to beat our internal expectations in Q1 in spite of all these sort of challenges, I think the answer is absolutely yes. We're feeling like there's a path to some margin upside as we go through the year. Now we will wait until Q2, but I gave the Q2 guide, and you're seeing that margin expansion accelerate, which is obviously sort of very encouraging for us. So we're feeling really good. And again, just to echo Patrick's comments, we think all the pieces are coming together.

Q: And then just the follow-up there. Can you maybe just walk us through your thinking on some of the remaining proceeds you've got left from the ES sale. I think Patrick mentioned thoughts on return on capital, things like that. So maybe just walk us through your views on share buybacks, dividends and assuming the rest probably goes to M&A.

A: This is Luke. Just before Patrick's respond, I just want to clarify the $500 million left on cash on balance sheet. Someone made a comment that we were initially said we're going to repay $3.75 billion of debt. In the end, when we repaid all of our debt, the remaining debt is so far out in terms of term. We have an average 4.5 years still left that the cost of paying off some of that debt just didn't sort of seem to make a lot of sense, but we knew we had all these capital investments in front of us. So to the question that was e-mailed in, that's the basis for that. And what are we going to do with all of our capital capacity, I'll hand it over to Patrick.

A: Yes. I think as we communicated, M&A pipeline is very robust at the moment. So we're working on a lot of great opportunities that will be sort of highly accretive to the overall book of business and sort of the earnings stream. So again, highly focused on that. And again, share buybacks will continue to be part of the sort of ongoing plan, as we press released last week, we did get relief from the OSC and the TSX not have those shares we bought back from the insider count against the NCIB. So we have an incremental sort of 21 million shares available for us to buy. So where we sit today, we continue to believe the company is undervalued here. So the Board and myself both believe that should be a part of the capital allocation plan, given what we see for '26 and '27, which was laid out in sort of our Investor Day. But I think from where we sit today, that is going to continue to be a part of the capital allocation plan as well as sort of M&A.